Question

1. A company’s profitability is BEST evaluated by examining a company’s:  
   1. Balance Sheet
   2. Income Statement
   3. Cash Flow Statement
   4. Statement of Changes in Equity

13.Assuming total asset turnover is revenue divided by average total assets, impairment write downs of a company’s long-lived assets will MOST LIKELY result in an increase in the company’s:
a.Debt to equity ratio
b.Total asset turnover
c.Both total asset turnover and debt to equity ratio

14.An investor concerned about a company’s long term solvency would MOST LIKELY examine the company’s:
a.Return on equity
b.Total asset turnover
c.Inventory turnover
d.Debt to equity ratio

19.All else being equal, which of the following would decrease ROA?
a.A decrease in the effective tax rate
b.A decrease in interest expense
c.An increase in average assets

Answer 1

1.
A company’s profitability is BEST evaluated by examining a company’s:
The answer is Option B. Income Statement.
Profitability is the performance aspect measured best by the Income statement. The balance sheet portrays the current financial position. The statement of cash flows shows how changes in balance sheet accounts and income affect cash and cash equivalents. Statement presents the changes in a company's Share Capital, accumulated reserves and retained earnings over the reporting period.
Therefore, the correct answer is B. Income Statement.

2.
Assuming total asset turnover is revenue divided by average total assets, impairment write downs of a company’s long-lived assets will MOST LIKELY result in an increase in the company’s:
The answer is Option C. Both total asset turnover and debt to equity ratio
Impairment write downs reduce Total Assets but do not affect revenue. Thus, the denominator in the Total Asset Turnover reduces but the numerator remains the same. As a result, Total asset Turnover is expected to increase.
Similarly, Impairment write-downs reduce equity (as a result of charge to Income statement) in the denominator of the Debt to Equity ratio but do not affect debt in the numerator, so the Debt to Equity ratio is expected to increase.
Therefore, the correct answer is C. Both total asset turnover and debt to equity ratio.

3.
An investor concerned about a company’s long term solvency would MOST LIKELY examine the company’s:
The answer is Option D. Debt to equity ratio
The Debt to equity ratio is a solvency ratio which is used as an indicator of financial risk.
Return on Equity measures the amount of profit generated from each unit of Equity, there is no involvement of leverage in Return on Equity and hence it is not an indicator of long term solvency. Neither Total Asset Turnover nor Inventory Turnover ratios are concerned with the financial solvency of the company. Total Asset Turnover measures the efficiency of a company in using its Assets to generate turnover while Inventory Turnover is a measure of the number of times Inventory is sold in a given cycle.
Therefore, the correct answer is D. Debt to equity ratio

4.
All else being equal, which of the following would decrease ROA?
The answer is Option C. An increase in average assets
Return on Assets is a percentage indicator of how profitable a company's assets are. It is calculated by dividing Net Income After Taxes by Average/Closing Total Assets.
Therefore, an increase in average assets shall Increase the denominator while the numerator remains the same, as a result the Return on Assets shall decrease.
Whereas,a decrease in the effective Tax Rate should increase the Net Income, thus increasing the numerator and consequently increasing the Return on Assets. Similarly, a decrease in interest expense shall also increase the Net Income thus increasing the Numerator and consequently increasing the Return on Assets.
Therefore, the correct answer is C. An increase in average assets.


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